One of Indonesia’s main fiscal problems is the ever increasing amount of public funds spent on energy subsidies (these include fuels and electricity subsidies). These subsidies aim to support the poorer segments of Indonesian society but several studies conclude that it are in fact the middle class and elite segments that benefit the most of these energy subsidies. Furthermore, by keeping energy prices artificially low, the government distorts the economy by creating a more-or-less ‘false economy’.

In the revised 2014 State Budget (APBN-P 2014), IDR 392.1 trillion (USD $33.2 billion) has been reserved for energy subsidies (IDR 285 trillion for fuel subsidies and IDR 107.1 trillion for electricity subsidies). This implies that 15.3 percent of the country’s total state spending (based on the 2014 state budget) is allocated to energy subsidies. Infrastructure spending – although much needed as Indonesia is characterized by a lack of quality and quantity of infrastructure, giving rise to high logistics costs and a weaker investment or business climate – only receives 8.2 percent (IDR 151 trillion) of total government spending. Despite the fact that public investments in infrastructure, healthcare or education are much more (long-term) productive and structural solutions, the government has enormous difficulty to alter its ‘subsidy culture’. Reducing these subsidies indeed imply political risks as it triggers public outcry and can push people into (near) poverty as inflation accelerates (this negative side-effect can be limited through cash-transfer programs to the poor).

The table below shows that energy subsidies in Indonesia have grown rapidly.

Indonesian Energy Subsidies 2005-2014:

Year

Fuel Subsidy

Electricity Subsidy

Total Energy
Subsidies

2014

210.7

71.4

282.1

2013

193.8

80.9

274.7

2012

137.4

65.0

202.4

2011

165.2

90.4

255.6

2010

82.4

57.6

140.0

2009

45.0

49.5

94.6

2008

139.1

83.9

223.0

2007

83.8

33.1

116.9

2006

64.2

30.4

94.6

2005

95.6

8.9

104.4

in IDR trillionSource: Investor Daily
In June 2013, tthe Indonesian government raised prices of subsidized fuels by an average of 33 percent. Gasoline was raised by 44 percent to IDR 6,500 (USD $0.55) and diesel by 22 percent to IDR 5,500 (USD $0.47) per liter. However, a significant amount of Indonesian fuel prices remain subsidized today. For example, the ‘true’ economic price of gasoline is currently approximately IDR 10,000, meaning that about 35 percent of every liter of gasoline is subsidized by the government. Recently, Indonesian Finance Minister Chatib Basri stated that the government needs to raise prices of subsidized fuels again (perhaps even this year), but there are no concrete plans yet.

Besides burdening the state budget, expensive fuel subsidies also give rise to record car and motorcycle sales in Indonesia thereby placing more stress on the country’s already weak infrastructure. Traffic jams in the bigger cities of Indonesia are notorious and seriously reduce attractiveness of doing business in Southeast Asia’s largest economy. Moreover, public transportation in Indonesia is generally weak and chaotic. Increased public investments in public transportation would most likely relieve some pressure on the busy roads as well as somewhat curb domestic fuel consumption.

Another negative consequence of fuel subsidies is increasing pressure on Indonesia’s current account deficit (which had reached a record high in 2013). As domestic oil production has been in a state of decline for over a decade, Indonesia has had to rely more and more on expensive oil imports. This year, the current account deficit is expected to be around 3 percent of the country’s gross domestic product (GDP), which constitutes an improvement from last year (USD $29.09 billion, or 3.33 percent of GDP), but is still problematic. Meanwhile, the government budget deficit is expected to increase from 1.69 percent to 2.5 percent of GDP in 2014.

Regarding electricity, the government is considering to raise electricity tariffs in July 2014 (which will require approval from the House of Representatives’ Commission VII on energy affairs first). The price may be raised by 34.7 percent for industries and up to 34 percent for households on 1 July. This increase will be gradually. Homes using 1,300 volt-ampere, 2,200 volt-ampere, 3,500 volt-ampere or 5,000 volt-ampere may see average increases of 11.36 percent, 10.43 percent and 5.70 percent respectively in July, September and November. Industries will experience 11.57 percent price hikes in the same months. Business players have filed their complaints against these higher subsidies.